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California Public Employees' Retirement System CalPERS

PRI reporting framework 2019

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ESG incorporation in actively managed listed equities

Implementation processes

LEI 01. Percentage of each incorporation strategy

01.1. Indicate (1) which ESG incorporation strategy and/or combination of strategies you apply to your actively managed listed equities and (2) the breakdown of your actively managed listed equities by strategy or combination of strategies (+/- 5%)

ESG incorporation strategy (select all that apply)

Percentage of active listed equity to which the strategy is applied
100 %
Total actively managed listed equities 100%

01.2. Describe your organisation’s approach to incorporation and the reasons for choosing the particular ESG incorporation strategy/strategies.

All portfolios are subjected to a multi-pronged approach to ESG Integration. This approach applies globally and does not differ by sector or geography. For example, we actively engage portfolio companies on ESG risks and opportunities, we use issue-based or thematic screens during the portfolio construction process to exclude certain stocks that violate our Governance and Sustainability Principles or are excluded based on Board or legislative mandates, we invest in strategies related to sustainability (e.g., ESG), and, we’ve established manager expectations for integrating ESG into the investment decision-making process for both internally and externally managed strategies. 

All levels of the organization, from Managing Investment Directors to Investment Officers, are responsible for the implementation of ESG into the investment decision-making and portfolio construction process.

CalPERS chose this integration approach for its expected impact on the aggregate listed equity portfolio and desire to create a holistic Sustainability Investment program. 

01.3. If assets are managed using a combination of ESG incorporation strategies, briefly describe how these combinations are used. [Optional]


LEI 02. Type of ESG information used in investment decision (Private)


LEI 03. Information from engagement and/or voting used in investment decision-making (Private)


(A) Implementation: Screening

LEI 04. Types of screening applied

04.1. Indicate and describe the type of screening you apply to your internally managed active listed equities.

Type of screening

Screened by

Description

Divestment - Tobacco: divest from all tobacco stocks and bonds. 

Divestment - Sudan and Iran Acts: identify, monitor, and ultimately divest from companies with business activities in Iran/Sudan, unless exempt on humanitarian grounds, subject to the plan's fiduciary duty which requires that risks and returns take primacy.

Holocaust Era and Northern Ireland: monitor and annually report on investment holdings in companies and their affiliates doing business in California and owe compensation to victims of slave or forced labor during World War II. 

Divestment Assault Weapon Manufacturers: divest from manufacturers of firearms banned for sale in California.

Divestment - Thermal Coal Companies Act: engage publicly traded coal companies that generate 50% or more revenue from mining thermal coal. If engagement is not successful, CalPERS is required to divest.

Governance and Sustainability Principles Screen - emerging market companies are evaluated relative to Global Governance and Sustainability Principles and removed from benchmark consideration if any Principles are violated

CalPERS’ Total Fund Divestment policy states our preference for constructive engagement over divestment.

Screened by

Description

ESG Focused

In 2017, CalPERS learned of potential implementation issues that forced the defunding of CalPERS' internally managed Climate Change Index Fund. Prior to its defunding, CalPERS initiated an ESG research effort aimed at identifying replacement strategies. A cross-asset class team reviewed, analyzed, and scored ESG strategies for implementation. Two strategies were identified and funded in 1H 2018. The two strategies are managed externally by QS Investors and AXA-Rosenburg and implemented internally.

 

 

Screened by

          CalPERS  Governance and Sustainability Principles
        

Description

CalPERS Principles are available on CalPERS website at the following URL: https://www.calpers.ca.gov/docs/policy-global-governance.pdf

 

 

04.2. Describe how you notify clients and/or beneficiaries when changes are made to your screening criteria.

Screening criteria are governed by the Board's Divestment Policy (https://www.calpers.ca.gov/page/investments/about-investment-office/policies ) via Investment Committee. Screening criteria are based on a number of factors. Screening criteria are either mandated by CalPERS Board (e.g., tobacco) or via legislative mandates and/or state law. Annual reports are provided to the public through Board agenda items, which can be accessed on the CalPERS website.

It is staff's responsibility to inform external managers of any changes to the exclusions list on a quarterly basis. Also, Global Equity's benchmark provider works closely with staff to ensure necessary changes are made to benchmarks  in a timely fashion.

 


LEI 05. Processes to ensure screening is based on robust analysis

05.1. Indicate which processes your organisation uses to ensure screening is based on robust analysis.

          Under the  Total Fund Governance and Sustainability Strategic Plan and Total Fund Policy, CalPERS' Investment Compliance and Operational Risk(ICOR) oversees divestment and exclusionary lists.
        

05.2. Indicate the proportion of your actively managed listed equity portfolio that is subject to comprehensive ESG research as part your ESG screening strategy.

05.3. Indicate how frequently third party ESG ratings are updated for screening purposes.

05.5. Additional information. [Optional]


LEI 06. Processes to ensure fund criteria are not breached (Private)


(B) Implementation: Thematic

LEI 07. Types of sustainability thematic funds/mandates

07.1. Indicate the type of sustainability thematic funds or mandates your organisation manages.

07.2. Describe your organisation’s processes relating to sustainability themed funds. [Optional]

Sustainability Themed funds

CalPERS continually seeks opportunities to source innovative and accretive portfolios for our Global Equity portfolio. Recently, CalPERS initiated an ESG research effort aimed at identifying strategies that uniquely incorporate ESG risk factors in its selection and construction process. In 1H 2018, CalPERS funded two ESG strategies that use both quantitative and fundamental ESG analysis to identify securities that improve the ESG characteristics of the portfolio thus incorporating environmental and social considerations. The portfolios are managed by internal staff based on information provided by QS Investors and AXA-Rosenberg.


(C) Implementation: Integration of ESG factors

LEI 08. Review ESG issues while researching companies/sectors

08.1. Indicate the ESG factors you systematically research as part of your investment analysis and the proportion of actively managed listed equity portfolios that is impacted by this analysis.

ESG issues

Proportion impacted by analysis
Environmental

Environmental

Social

Social

Corporate Governance

Corporate Governance

08.2. Additional information. [Optional]

ESG is fully integrated into the investment decision making process of the Global Equity Aggregate portfolio.


LEI 09. Processes to ensure integration is based on robust analysis

09.1. Indicate which processes your organisation uses to ensure ESG integration is based on a robust analysis.

09.2. Indicate the proportion of your actively managed listed equity portfolio that is subject to comprehensive ESG research as part your integration strategy.

09.3. Indicate how frequently third party ESG ratings that inform your ESG integration strategy are updated.

09.4. Indicate how frequently you review internal research that builds your ESG integration strategy.

09.5. Describe how ESG information is held and used by your portfolio managers.

09.6. Additional information.[Optional]

CalPERS works collaboratively with its research providers, external managers and sell-side analysts to fully understand the risks and opportunities of its listed equity portfolios. Research reports are updated as new information becomes available that materially impacts company operations or portfolio analytics. Individual portfolios are analyzed monthly to assess the ESG characteristics relative to the Policy benchmark as well as ESG specific benchmarks. If issues of concerns are identified, staff researches the issue, communicates with external managers and research providers and may engage company management. The intent is to better understand the risks and opportunities created by the issue/event and determine appropriate action.


LEI 10. Aspects of analysis ESG information is integrated into (Private)


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